Beige Book Report: Atlanta
April 15, 2020
Summary of Economic Activity
On balance, economic activity in the Sixth District deteriorated from mid-February to late March, and the outlook diminished as a result of the COVID-19 pandemic. Labor market conditions weakened significantly as businesses reported widespread layoffs and furloughs. Nonlabor costs were stable. Retail contacts noted plunging sales of discretionary goods, and surges in spending on essential items. Hospitality and tourism contacts reported significant declines in activity as conventions were cancelled and attractions were temporarily shuttered. Activity in residential and commercial real estate slowed somewhat. Manufacturing activity deteriorated, but new orders held steady or increased as a result of changes in product demand. Overall transportation activity declined. District bankers reported mixed conditions.
Employment and Wages
District labor market conditions deteriorated over the reporting period as the spread of COVID-19 precipitated a sharp contraction in activity leading to layoffs and furloughs, especially in retail, tourism and hospitality. Grocery, home improvement, and discount stores, along with home delivery services, experienced a surge in demand resulting in a strong increase in hiring. Growing restrictions on public gatherings forced many restaurants to pivot to take-out and delivery services in an effort to stay in business and preserve some jobs. Manufacturing and distribution workforces remained largely intact and those producing high-demand products indicated working longer hours. Most firms with the ability to do so transitioned to remote working. In response to a sharp drop in demand, the region's energy sector experienced a contraction in employment. Some businesses noted actively working to connect laid-off or furloughed employees with firms that were hiring.
Some District firms reported cutting pay, eliminating bonuses, and reducing hours, in efforts to retain employees. However, high demand sectors, such as grocery, distribution, and warehousing announced increases in hourly wages or bonuses. Some companies still hiring have postponed pre-employment background checks like drug tests and finger printing, largely in an effort to reduce physical contact. Many contacts reported relaxing attendance policies and increasing paid time off and leave allowances. Some noted an extension of premium pay to essential workers or employees who deal directly with the public.
Prices
Most contacts reported stable input costs over the reporting period with expectations that prices may drop as a result of lower overall demand due to the COVID-19 pandemic. With considerable uncertainty regarding supply chains and demand, most sectors reported an effort to avoid raising prices. Oil price declines benefitted businesses outside of the energy sector, helping defray the rising cost of freight. The Atlanta Fed's Business Inflation Expectations survey showed year-over-year unit costs were up 1.6 percent in March, virtually unchanged from February. Over the next twelve months survey respondents, on average, indicated they expect unit costs to rise 1.9 percent.
Consumer Spending and Tourism
District retailers reported sales growth of grocery and household products, office equipment, and home improvement goods, which partially offset some of the steep decline in discretionary consumer spending activity due to COVID-19. E-commerce activity accelerated as brick-and-mortar sales plummeted. There were some reports of supply chain bottlenecking as high-traffic retailers such as grocers, big box, and warehouse chains struggled to manage the influx of shipments to fill empty shelves.
Tourism and hospitality contacts reported a massive decline in activity across the District as a result of COVID-19. By mid-March, most major conferences and conventions had been cancelled or postponed, the majority of tourist attractions were temporarily shuttered, and hoteliers reported historically low occupancy rates. Several contacts noted that hotels with locations close to hospitals were being considered for conversion for medical use and shelters for COVID-19 patients or hospital staff.
Construction and Real Estate
After a strong start to the year, District housing activity was significantly disrupted by the COVID-19 pandemic. Contacts indicated that since their sales pipeline was strong prior to the outbreak, recent transactions were solid and cancellations were muted. However, market participants anticipate a contraction in second quarter sales as in-person traffic and new sales activity declined significantly since early March. Expectations for potential disruptions in functions such as permitting, appraisals, deed filings, and notarizations due to social distancing were noted, and some reports indicated a tightening of credit and lending standards. Construction and development activity slowed and builders began strengthening cash reserves and guarding balance sheets.
Commercial real estate (CRE) contacts reported a deceleration in new leasing inquiries amid the COVID-19 pandemic. However, leasing activity that was already in the pipeline appeared to be moving forward. Declining tourism and travel activity significantly impacted CRE in the hospitality and retail sectors. Investment property sales slowed markedly due to issues associated with the slowing of financing from commercial mortgage backed securities and non-bank lenders; however, contacts reported that capital was readily available at banks for the financing of CRE projects. Banks reported that originations continued in the CRE space. Reports of tenants seeking rent relief have begun to emerge.
Manufacturing
Manufacturing firms reported solid overall activity in late February, but indicated conditions rapidly deteriorated in early March due to the COVID-19 pandemic. Despite the decline in activity, some firms suggested that new orders were holding steady or even increasing due to changes in product demand. Supply delivery times were reported to be increasing.
Transportation
District transportation contacts continued to report varying levels of activity, and the majority noted some degree of negative impacts to business due to COVID-19. Activity for logistics, trucking, and freight brokerage firms held steady on average as consumer demand for discretionary products declined and demand for essential items increased. However, according to railroad contacts, overall rail traffic fell by near double digits as compared with year-earlier levels, driven by declines in the movement of grain, coal, aggregates and iron and steel scrap, and motor vehicles and parts. Intermodal traffic also fell. Air cargo contacts cited a continued deterioration in freight volumes over the reporting period. Sizeable declines in revenue and massive shifts in costs, including implementing pay cuts across the board to help offset some of the revenue losses, were mentioned. Ports saw year-over-year declines in container activity as imports from Asia slowed, and significant declines in overall freight activity for the foreseeable future are anticipated.
Banking and Finance
Financial institutions expressed concerns about the potential increase in delinquencies and the impact on both earnings and capital due to uncertainties around the COVID-19 outbreak. Slower loan growth was reported and some indicated they were being more careful about underwriting, especially with residential and some commercial real estate properties. Financial institutions reported contacting customers in industries most affected by the pandemic to determine borrowers' potential needs for accommodations. These industries included travel and hospitality, retailers, restaurants and their suppliers, transportation and logistics, and health care providers. Given declines in market value of some institutions, goodwill impairments were being considered. Liquidity remained stable. Some financial institutions reported growth in deposits while others experienced large cash withdrawals.
Energy
Global demand for crude oil and liquefied natural gas fell over the reporting period primarily as a result of the COVID-19 pandemic, in spite of the fall in oil prices. As a result of price declines, broad cost-cutting measures, including reductions in major capital spending plans, suspension of share buybacks, delays of onsite scheduled maintenance, hiring freezes, and the dismissal of contractors were reported. Industrial plant and construction contacts reported delays in some petrochemical new build and expansion projects. Utilities firms noted that power usage declines among commercial business lines were nearly offset by a spike in residential power usage, as people spend more time at home. Utilities firms anticipate a further drop in power demand, particularly from the industrial segment, as budget cuts make their way through the sector.
Agriculture
Agricultural conditions remained mixed. Most of the District remained drought free, with the exception of much of Florida and other parts of the Gulf coastal region, which experienced abnormally dry conditions. On a month-over-month basis, the March production forecast for Florida's orange crop was down from both last month's forecast and last year's production while the grapefruit production forecast was down month-over-month but remained ahead of last year's production. Contacts reported the COVID-19 pandemic has resulted in recent significant price increases for corn, rice, soybeans, milk and eggs, and an increase in demand for Florida oranges. Contacts also reported that some District states modified trucking weight and hour requirements in response to COVID-19, which has had a positive effect on getting product to market more quickly.
For more information about District economic conditions visit: www.frbatlanta.org/economy-matters/regional-economics